Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly filing for the period ended July 1, 2012, covering the three and nine months ended July 1, 2012, compared with July 3, 2011. Optex manufactures optical sighting systems, periscopes, rifle and surveillance sights, and night-vision assemblies primarily for U.S. and foreign military applications. The company had 64 full-time-equivalent employees and 144,444,940 common shares outstanding as of August 14, 2012.
Financial Performance and Position
| Metric | Three Months 2012 | Three Months 2011 | Nine Months 2012 | Nine Months 2011 |
|---|---|---|---|---|
| Revenue | $3.476 million | $3.231 million | $11.608 million | $11.971 million |
| Gross profit | $0.669 million | $0.550 million | $2.006 million | $1.805 million |
| Gross margin | 19.1% | 17.2% | 17.2% | 15.0% |
| Operating income (loss) | $(0.118) million | $(0.042) million | $(0.102) million | $0.064 million |
| Net income (loss) | $(0.137) million | $(0.035) million | $(0.256) million | $(0.002) million |
| Net income (loss) applicable to common shareholders | $(0.137) million | $(0.139) million | $(0.150) million | $(0.309) million |
Cash increased to $2.302 million at July 1, 2012 from $1.514 million at October 2, 2011. Nine-month operating cash flow was $1.538 million, offset by $0.293 million of investing cash outflows and $0.457 million of financing cash outflows. Inventory increased to $5.024 million from $4.088 million, while accounts receivable declined to $2.067 million from $2.392 million.
Total assets were $10.929 million and total liabilities were $3.323 million at July 1, 2012. The company had no balance outstanding under its credit facility at quarter-end. The amended Avidbank revolving facility provides up to $1.0 million against eligible receivables, with a renewable maturity date of July 15, 2014, and requires a zero balance for at least 30 consecutive days during each loan period.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 9.4%, principally from higher glass-periscope production and new sighting-system milestone and repair revenue. Nine-month revenue decreased 3.3%.
- Quarterly gross margin improved to 19.1% from 17.2%; nine-month gross margin improved to 17.2% from 15.0%, reflecting product mix and the completion of loss-making Howitzer programs.
- General and administrative expense rose 25.3% in the quarter and 19.0% for nine months, driven by business-development hiring, advertising and public relations, legal costs, incentive compensation, and a 401(k) match program.
- The company reported a quarterly operating loss of $0.118 million versus $0.042 million and a nine-month operating loss of $0.102 million versus prior-year operating income of $0.064 million.
- The nine-month loss applicable to common shareholders improved to $0.150 million from $0.309 million, primarily because preferred dividends were waived. No preferred dividends remained payable at July 1, 2012.
- Customer advance deposits increased to $1.772 million, including $0.600 million classified as current and $1.172 million as long-term, primarily from milestone billings under the M36 contract.
- Backlog increased to $16.9 million from $13.5 million, a 30.4% increase. New orders during the first three fiscal quarters totaled approximately $17.0 million.
Guidance, Outlook, Risks, and Unusual Items
- The $8.0 million, five-year M36 contract is expected to generate approximately $0.7 million of fiscal 2012 deliveries, with full production beginning in the first quarter of fiscal 2013 at approximately $1.5 million annually thereafter.
- Management expected higher sighting-system deliveries and approximately 21% growth in general and administrative costs for fiscal 2012, excluding legal costs.
- Management expected fourth-quarter periscope revenue to decline approximately 9% year over year, while forecasting approximately 4% annual growth in periscope revenue for fiscal 2012. These expectations were subject to declining federal government orders and uncertain replacement of lost competitor capacity.
- On July 30, 2012, primary plastic-periscope competitor Miller-Holzwarth Inc. closed its business. Management was evaluating potential effects on future orders.
- The company’s $0.8 million equitable-adjustment claim related to manufacturing problems on an Aiming Circle Howitzer program was rejected on May 31, 2012 and appealed to the Armed Services Board of Contract Appeals. No future margin impact was expected because the related losses had already been recognized, but the outcome was uncertain.
- The company recognized $0.233 million of substantive milestone revenue in the quarter and $0.356 million in the nine-month period. Approximately $1.8 million of customer advance deposits related to non-substantive milestone billings remained a liability for products to be delivered through 2017.
- Inventory reserves increased to $0.826 million from $0.754 million. The company also recorded $0.073 million of provision for inventory valuation during the nine-month period.
- Prepaid royalties of $0.208 million relate to patent rights for a digital periscope product line. Amortization is expected to begin in fiscal 2013, with anticipated product orders beginning in 2013.
- The company had 48.5 million outstanding stock options as of July 1, 2012, including 46.1 million options granted during the nine-month period at an exercise price of $0.01 per share. Unrecognized stock-based compensation was approximately $0.313 million.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. The filing reported no material pending or threatened litigation and no material changes in previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether the M36 contract converts from milestone-funded development into the projected production ramp and expected annual revenue.
- The timing and collectability of the $1.772 million in customer advance deposits and the company’s related material-purchasing obligations through 2017.
- The outcome of the Aiming Circle Howitzer equitable-adjustment appeal.
- Whether backlog converts into revenue as scheduled, particularly the $6.5 million periscope and $7.9 million sighting-system amounts.
- The effect of federal defense-budget trends, completed Howitzer programs, and the closure of Miller-Holzwarth on future orders and product mix.
- Inventory utilization, reserve adequacy, and working-capital requirements as M36 and periscope production expands.
- Potential dilution from 48.5 million options, 9.9 million warrants, and convertible Series A preferred stock, all excluded from diluted earnings per share as anti-dilutive.